When the Bank of Canada launched a program in mid-April to begin buying corporate bonds, it was embarking on a journey into unknown territory for a Canadian central bank. It’s turned out to be little more than a day trip.
The Corporate Bond Purchase Program, intended to support corporate borrowing in pandemic-roiled markets by buying up to $10-billion in corporate paper over 12 months, has scraped together just $133-million since its launch in late May. In July, the program hasn’t made any purchases at all – spanning the past seven auctions.
Bond strategists say that with a remarkably strong corporate bond market emerging after the COVID-19-related market turmoil, dealers haven’t needed to turn to the Bank of Canada to find a home for their supply. With demand booming and new supply slowing in recent weeks, there have been no takers in the central bank’s twice-weekly reverse auctions.
“We’ve seen a pretty significant repair in terms of market appetite, not just at home in Canada but globally, for all risk-based assets,” said Derek Holt, head of capital markets economics at Bank of Nova Scotia. “There’s less need for these programs.”
The program was announced at the height of the COVID-19 crisis as part of the central bank’s barrage of actions to help stabilize malfunctioning financial markets and keep crucial credit flowing to businesses, consumers and governments. The centrepiece of the strategy is the bank’s commitment to buy at least $5-billion a week of Canadian government bonds; the corporate program, as well as a commitment to buy up to $50-billion over 12 months of provincial bonds, are important complementary pieces.
While the corporate program is relatively small, it has garnered plenty of attention because it was the central bank’s first foray into corporate debt, crossing a line by taking monetary policy into private-sector financing. The bank was careful to structure the program to avoid appearances of playing favourites with individual companies or industry sectors, and to strictly limit its exposure to business risk.
Instead of being a key cog in the bank’s strategy, the corporate program has been barely a footnote in the bank’s $400-billion expansion of its balance sheet since the crisis began.
This despite the busiest quarter on record for new issuance of corporate debt, with more than $26-billion hitting the market between the start of April and the end of June. The flurry of activity indicates that the corporate bond market was already functioning quite well even before the Bank of Canada got its program off the ground in late May.
“It’s proving that this is a backstop-support facility, and not something that is basically making the Bank of Canada a hedge fund,” said Andrew Becker, head of Canadian-investment-grade debt origination at TD Securities, in an interview earlier this month. “It’s something set up to support the market when it needs it the most, and right now the market doesn’t need liquidity. The market needs, and investors want, more bonds – they don’t want to sell bonds.”
The program is structured as what is known as a reverse auction. The central bank announces in advance the maximum par value of bonds it is willing to buy in each auction, and invites bond dealers to tender bonds they wish to sell. So the bank’s purchases are largely restricted by the willingness of dealers to sell their bond holdings into the program.
Despite the lack of uptake, the very announcement of the program had a significant positive impact on the psychology of the market, said Scott Lampard, head of Global Markets at HSBC Bank Canada.
“The sheer act of them announcing that there was a source of demand, there was a bid in the market, was probably enough of a catalyst to get market function restored and stabilized,” he said.
As a result, Mr. Lampard said, “The actual need for the bank to go and extend its balance sheet into this asset class hasn’t been required to get the market functioning again.”
The Bank of Canada, for its part, had little comment about the absence of purchases under the corporate program this month, other than to say that its purchases “depend on market conditions and what bonds are offered to the bank through the tender offer process.”
But in the bank’s quarterly Monetary Policy Report, published July 15, it acknowledged that the use of the corporate bond facility “has been limited to date,” and said, “As market functioning improved globally and in Canada, Canadian corporations became better able to access markets directly for new borrowing that will support continued operations.”
It’s not just the bank’s corporate bond program that has faded as markets found their footing. The bank announced last week that it would reduce by half the scale two other programs, its purchases of new issues of federal government treasury bills and similarly short-term provincial money market instruments. Other emergency facilities designed to keep short-term credit taps open, such as purchases of commercial paper and bankers’ acceptances, have seen demand all but disappear.
Even the provincial-bond-buying program hasn’t been used as much as many experts had anticipated. The bank has purchased less than $6-billion in nearly three months, putting it on track to take up far less than the maximum $50-billion that the central bank had targeted.
Still, a Bank of Canada spokesperson noted that in the statement accompanying the bank’s July 15 interest-rate decision, the bank explicitly reaffirmed that “The provincial and corporate bond purchase programs will continue as announced.”
Strategists believe that even as the corporate bond program and some of the bank’s other market supports fall into disuse, the central bank will want to keep the programs up and running in case market instability flares up again, so that it can quickly deliver whatever support the markets need.
“They’ve signalled they’ll be willing to jump back in on some of these programs if need be,” Mr. Holt said. “I think the approach, to scale them back but keep the facilities in place, is probably prudent.”
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